What are the available options for password protecting a folder? I'm talking about requiring a password to actually access the folder, not just user access rights. Is the third-party software out there secure and stable? What are the recommendations?

This is a great question (I just asked and almost duplicate myself). Could someone with the required rep re-tag this as windows XP and Vista? Then it is a little bit less specific and the accepted answer still holds.
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Ron TuffinNov 19 '10 at 9:19

I have retagged to a generic Windows tag
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Joe TaylorNov 19 '10 at 9:52

oops, just retagged to windows-xp windows-vista...sorry didn't see the comment
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hbdgafNov 19 '10 at 14:19

6 Answers
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My Lockbox™ is a security software enabling you to password protect any folder on your computer.

The protected folder (lockbox) is hidden from any user and application of your system, including Administrator and System itself. It is impossible to access the lockbox not only from the local computer, but also from the net.

The program is extremely easy to use. You can set the lockbox location and the password during the setup procedure. After the setup is done, lockbox will be hidden and locked until you enter the valid password.

Folder Lock is a Windows program to encrypt or password protect files, folders, removable drives, partitions, USB sticks etc. In encryption mode it uses the strong 256-bit AES encryption algorithm to encrypt objects on the fly. In lock mode files, folders and drives are not encrypted but protected with a password.

Folder Lock is shareware ($39.95), try before you buy.

TrueCrypt and FreeOTFE are powerful (and free) alternatives, but might be an overkill for what you have in mind. They don't encrypt separate folders, but rather an entire filesystem (either a file-based "volume" or a whole disk).

I am a fan of truecrypt(additional + because it's free). Now that you have an encrypted drive you can use subst to put the "drive" where a folder should be...might take a couple more steps, but it's a free solution that just works.
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hbdgafNov 19 '10 at 13:35

If you have Windows 7 ultimate/Enterprise, I would suggest encrypting a partition with the built-in-tool Bitlocker, and storing your folder within that partition. You can also use a USB drive for that purpose. I somehow don't trust third-party softwares with something as important as encryption. I usually avoid them, and suggest against using them. I know I'm going to be downvoted, but thats just my opinigon.

You can try Private Disk, it creates a virtual disk inside your system, encrypting it with AES-256. The program is extremely easy to use.

Although it doesn't password protect a folder, I think it is a better choice.

The problem with the "password protected folder" paradigm is that such software needs to somehow integrate into Windows Explorer (otherwise the protected folder wouldn't appear as a folder). Besides that, it means that it will only work with Windows Explorer or some built-in file browser.

This imposes some constraints, rendering other programs unable to interact with the protected folder.

Private Disk's approach is fully transparent, any program will be able to work with the encrypted volume as if it were a regular one.

Unfortunately Windows 7 does not seem to support password protection of folders. This only appears to be possible through windows authentication, ie changing the security permissions of the folder to only be accessible to certain users.